April 2003

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

     

(See TCNC Website: www.oldrepublictitle.com/nc for our newsletters, newsletter index and forms)

 

APRIL 2003 TCNC NEWSLETTER 

MECHANICS’ LIENS – 180-DAY LIEN ENFORCEMENT PERIOD 

In Lynch v. Price Homes, Inc., 575 S.E.2d 543 (N.C.App. 2003), CCB foreclosed its deed of trust. The petitioner, a lien claimant, bought the property at the foreclosure sale. The sale generated $30,218.37 in surplus funds. Petitioner filed a petition to determine priority of various claims to these funds. While petitioner filed a timely claim of lien within the 120-day period in G.S. 44A-12(b), petitioner never commenced an action of lien enforcement within the 180-day period in G.S. 44A-13(a), so his lien was discharged under G.S. 44A-16(3). The petitioner in this case did not have anything keeping him from commencing an action within the 180-day period. Likewise, the other lienholders commenced their actions within the 180-day period. In this particular case, since it was a foreclosure sale, the surplus funds took the place of the encumbered property. Pursuant to G.S. 44A-13, the petitioner must meet the requirements of this statute “to enforce a perfected lien on the surplus funds, in the same manner required to enforce a perfected lien against property.” The Court of Appeals held that “With no prohibition against commencement of an enforcement action, petitioner’s failure to commence such an action within the time required by the materialman’s lien statutes prevents him from enforcing his lien.” 

DEFICIENCY JUDGMENT STATUTE 

Brumley v. Mallard, L.L.C., 575 S.E.2d 35 (N.C.App. 2002) is noted.  It construes the anti-deficiency judgment statute in G.S. 45-21.38. This statute only applies if the evidence of indebtedness indicates on its face that it is a purchase-money transaction. In this particular case, the promissory note stated that it was “given for consideration.” Meanwhile, the offer to purchase and the contract stated that the note was supposed to be secured be a purchase money deed of trust. In regard to the deed of trust and the promissory note, there was nothing on the face of either to imply that they were purchase money instruments. Therefore, the anti-deficiency statute could not be applied to the plaintiff’s action. 

The defendants also relied upon a portion of G.S. 45-21.38 which states that when the note or notes are prepared under the direction and supervision of the seller, the seller shall cause a provision to be inserted in the note disclosing that it is for purchase money of real estate; in default of which the seller shall be liable to purchaser for any loss which he might sustain by reason of the failure to insert said provisions as the statute requires. 

However, in disagreeing, the Court of Appeals found that the plaintiff took no part in the preparation of the promissory note or deed of trust, his only involvement being his refusal to sign the original documents as purchase money instruments. Defendant Gilbert’s attorney prepared the documents according to the agreement of the parties at the property closing. The above portion of the statute upon which the defendants relied anticipates a situation where the seller prepares security documents without the buyer’s participation and consent, unlike this case. The Court of Appeals also disagreed with the defendants’ argument that the amendment of the documents was not supported by consideration. There was a dissenting opinion. 

 

FIXTURE UCC SECURITY INTERESTS, DEED OF TRUST PRIORITY AND FORECLOSURE 

SCOPE AND SUMMARY 

This article will discuss the priority of a properly perfected security interest in a fixture versus a recorded deed of trust. The article will also cover related foreclosure problems. This article will assume that a filing perfecting a security interest in the fixture is properly prepared and filed. Therefore, this article will not cover the details of document preparation and filing.  Unless noted otherwise, the statutes referred to below refer to “new Article 9” effective July 1, 2001. 

A UCC financing statement encumbering goods that are or are to become fixtures must be filed in the register of deeds’ office where the related real property is located. A form UCC financing statement or a deed of trust complying with Article 9 can be used to secure a fixture security interest. New G.S. 25-9-334, replacing former G.S. 25-9-313, sets out the rules of priority of a UCC security interest in fixtures as against other interests. The general rule is that the UCC financing statement must be filed before a purchaser’s deed or lender’s deed of trust is recorded in order to have priority over the deed or deed of trust with respect to the fixture. A special rule governs a UCC purchase money security interest. In that case, if a deed of trust is recorded before the fixture is affixed, a subsequently filed UCC financing statement securing purchase money will have priority over the previously recorded deed of trust if the UCC financing statement is filed no later than 20 days after the fixture becomes affixed to the real property. That rule is subject to a special rule for a “construction mortgage.” In order to have priority over a construction mortgage as defined and to the extent described in G.S. 25-9-334(h), a purchase money security interest financing statement must be recorded prior to the mortgage’s recordation. G.S. 25-9-334(e) and (f) contain exceptions to the rule for construction mortgages for interests in, for example, certain readily removable equipment. These priority rules in G.S. 25-9-334 present the attorney foreclosing a deed of trust with challenges with respect to when a subsequently filed UCC financing statement is or is not eliminated by the foreclosure. 

There are some excellent articles about “new Article 9” including P. Ebling and S. Weise, What A Dirt Lawyer Needs To Know About New Article 9 Of The UCC, 37 Real Property, Probate and Trust Journal 191 (Summer 2002). 

 

DISCUSSION 

1. What is a fixture? 

            G.S. 25-9-102(a)(41) defines “fixtures” as follows: 

“Fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law. 

This definition is unchanged in substance from the corresponding definition in G.S. 25-9-313.  Therefore, North Carolina case law will determine what constitutes a fixture. Discussion of the case law is beyond the scope of this article. However, G.S. 25-9-334(a) states that: 

A security interest does not exist under this Article in ordinary building materials incorporated into an improvement on land. 

The above definition refers to “goods.” The pertinent parts of G.S. 25-9-102(a)(44)’s definition of “goods” is set out as follows: 

“Goods” means all things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. 

2. Perfection of a security interest in a fixture. 

A security interest in a fixture, or in goods that are to become fixtures, is perfected by filing a financing statement. G.S. 25-9-310(a). (See former G.S. 25-9-302.) Among other requirements, the financing statement must indicate that it covers goods that are fixtures or that are to become fixtures, indicate that it is to be filed in the real property records and provide a description of the real property to which the goods are related. G.S. 25-9-502(b).  The form in G.S. 25-9-521(a) has blocks to check.  The filing office is the register of deeds’ office in the county where the related real property is located. G.S. 25-9-501(a)(1)b. (See former G.S. 25-9-401.)

A deed of trust can also constitute a fixture filing financing statement. The deed of trust is effective, from its recording, as a financing statement filed as a fixture filing if it indicates the goods that it covers and satisfies the requirements for a financing statement. G.S. 25-9-502(c). This is comparable to, but much clearer than, the rule appearing in former G.S. 25-9-402. 

3. Period of effectiveness of financing statement. 

The general rule is that a financing statement is effective for a period of five years after the date of filing. G.S. 25-9-515(a). This is consistent with the rule in former G.S. 25-9-403(2). 

G.S. 25-9-515(b) provides that, except as provided in G.S. 25-9-515(e), (f) and (g), an initial financing statement filed in connection with a public-finance transaction or manufactured home transaction is effective for a period of thirty years after the date of filing if the filing indicates it secures that type of transaction. 

Upon expiration of the period for effectiveness, the financing statement lapses unless, before a lapse, a continuation statement is filed under G.S. 25-9-515(d).  G.S. 25-9-515(c).  (See former G.S. 25-9-403(2).)  G.S. 25-9-515(d), comparable to former G.S. 25-9-403(3), provides as follows: 

A continuation statement may be filed only within six months before the expiration of the five-year period specified in subsection (a) of this section or the 30-year period specified in subsection (b) of this section, whichever is applicable. 

When the continuation statement is filed within the period in G.S. 25-9-515(d), the effectiveness of the initial financing statement continues for a period of five years commencing on the day on which the financing statement would have become ineffective in absence of the filing of the continuation statement. G.S. 25-9-515(e). Compare this to former G.S. 25-9-403(3). Lapse of the continued filing creates the result in G.S. 25-9-515(c).  It ceases to be effective.  It should be noted that there is no limit on continuation statements which have the same effectiveness as noted. 

A new rule applies to a “transmitting utility financing statement.” G.S. 25-9-515(f) provides that if a debtor is such a utility, and the filed financing statement so indicates, the financing statement is effective until a termination statement is filed. 

When a mortgage or deed of trust is used as a financing statement under G.S. 25-9-502(c), it remains effective until the mortgage or deed of trust is released or satisfied of record or its effectiveness otherwise is terminated as to the real property. G.S. 25-9-515(g). 

A continuation statement can be filed without first obtaining relief from the automatic stay in bankruptcy. 11 U.S.C. Sec. 362(b)(3); 11 U.S.C. Sec. 546(b). 

A continuation is accomplished by using a UCC Financing Statement Amendment illustrated in G.S. 25-9-521(b). 

4. Priority of security interest in fixtures. 

a. General comments. 

G.S. 25-9-334, replacing former G.S. 25-9-313, governs. However, G.S. 25-9-334 follows its predecessor. Official Comment, par. 2.         

b. General rules. 

G.S. 25-9-334(c) sets forth the general rule to which there are exceptions discussed below. A security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the real property other than the debtor. The prime exception is that, subject to other exceptions noted below, a UCC financing statement encumbering  fixtures must be filed before the other interest in order to have priority over it.  G.S.25-9-334(e)(1). 

c. Purchase money security interests. 

G.S. 25-9-334(d) sets out a rule pertaining to “fixture purchase-money priority.” The rule is subject to G.S. 25-9-334(h) pertaining to the priority of a “construction mortgage.” G.S. 25-9-103(a) and (b) should be consulted for a definition of a purchase money security interest in goods. Generally, a fair paraphrasing is that a purchase money security interest occurs when the debtor gives the secured party a security interest in the goods purchased contemporaneous with the purchase. If the debtor acquires the property on unsecured credit and subsequently creates the security interest to secure the purchase price, the security interest is not a purchase money security interest. Official Comment, par. 3. There is no requirement that the purchase money lender secured party must be the seller of the goods. G.S. 25-9-334(d) provides the following: 

Fixtures purchase-money priority. — Except as otherwise provided in subsection (h) of this section, a perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property and:

(1) The security interest is a purchase-money security 

                         interest;

(2) The interest of the encumbrancer or owner arises

                         before the goods become fixtures; and

(3) The security interest is perfected by a fixture filing 

                  before the goods become fixtures or within 20 days 

                  thereafter.  (Emphasis added.) 

As a result of G.S. 25-9-334(d), if the owner O gives M a deed of trust which is recorded and subsequently, the fixtures are affixed and F perfects F’s purchase money security interest by a fixture filing before the goods become fixtures or within 20 days thereafter, F’s purchase money security interest will have priority over M’s deed of trust as to the fixture. Official Comment, par. 7. 

            The Official Comment, par. 7, makes it clear that 

It should be emphasized that this purchase-money priority with the 20-day grace period for filing is limited to rights against real property interests that arise before the goods become fixtures. There is no such priority with the 20-day grace period as against real property interests that arise subsequently. (Emphasis added.) 

The statute, G.S. 25-9-334(d)(2) (quoted above) in particular, also uses the term “arises.” If O gives M an unrecorded deed of trust before the goods become fixtures so that, as between O and M under North Carolina case law, the interest of M arises before the goods become fixtures and subsequently, in the following order, the goods become fixtures., M records M’s deed of trust and F files his purchase money security interest financing statement within 20 days after the goods become fixtures, does M or F have priority as to the fixture? The Official Comment to G.S. 25-9-334 gives no clue. It is quite possible to argue validly that F would prevail under G.S. 25-9-334(d) due to the broad scope of the word “arises.” After all, G.S. 25-9-334(d) uses the term “arises,” instead of “is recorded” or “has an effective date of priority” being substituted for “arises.” 

Therefore, in sum, G.S. 25-9-334(d) creates a situation where a purchase money security interest fixture financing statement filed after the recording of a deed of trust can have priority over the deed of trust as to the fixture only. It should be noted that while G.S. 25-9-502(b) requires the financing statement to indicate that it covers fixtures and the statutory form in G.S. 25-9-521(a) has a block to check indicating that the collateral includes fixtures, there is no statutory requirement for the financing statement to indicate that it secures a purchase money security interest. Therefore, when a deed of trust is to be foreclosed, it might be difficult to tell whether such a financing statement has priority over or is subordinate in priority to the deed of trust to be foreclosed. If the financing statement never existed, the holder of a deed of trust is most certainly entitled to have its lien extend to the after affixed fixture. As a practical matter with respect to such fixtures, the foreclosing lender needs to either disregard the fixtures since they did not exist when the deed of trust was recorded or perform an off-record inquiry as to the status of the fixture filing. If that inquiry concludes that the fixture filing filed after the recording of the deed of trust has priority under G.S. 25-9-334(d), the foreclosure of the deed of trust will not cut off and extinguish the UCC interest regardless of whether or not the foreclosing lender gives the fixture secured party notice under G.S. 45-21.16 or otherwise.  Fixture filings filed after the recording of a deed of trust that has been foreclosed should be investigated and reported to the title insurer. 

d. “Construction mortgages.” 

G.S. 25-9-334(h), similar to former G.S. 25-9-313(6), pertaining to the “priority of a construction mortgage,” constitutes an exception to the rule in G.S. 25-9-334(d) discussed above. It provides as follows: 

Priority of construction mortgage. – A mortgage is a construction mortgage to the extent that it secures an obligation incurred for the construction of an improvement on land, including the acquisition cost of the land, if a recorded record of the mortgage so indicates. Except as otherwise provided in subsections (e) and (f) of this section, a security interest in fixtures is subordinate to a construction mortgage if a record of the mortgage is recorded before the goods become fixtures and the goods become fixtures before completion of construction. A mortgage has this priority to the same extent as a construction mortgage to the extent that it is given to refinance a construction mortgage. (Emphasis added.) 

 

 “Mortgage” is defined in G.S. 25-9-102(a)(55) broadly in a way to include a deed of trust. G.S. 25-9-334(h) requires the “mortgage” to contain the above quoted indication or disclosure in order to have priority, but does not require the “mortgage” to comply with Article 7 or Article 9 of Chapter 45 pertaining to (1) future advances and future obligations and (2) equity lines, respectively. G.S. 25-9-334(h) applies regardless of whether or not the advances are obligatory or are made pursuant to a commitment. Official Comment, par. 11. G.S. 25-9-334(h)’s reference to G.S. 25-9-334(e)(1) makes it clear that if the UCC financing statement encumbering fixtures is filed before the “construction mortgage” is recorded, the UCC interest will have priority as to the fixture. Official Comment, par. 11. 

G.S. 25-9-334(h) is further subject to the rest of G.S. 25-9-334(e) and (f). The perfected security interest in fixtures has priority over a conflicting interest of an encumbrancer or owner of real property under G.S. 25-9-334(e)(2), (3) or (4) if 

(2) Before the goods become fixtures, the security interest is  

      perfected by any method permitted by this Article and the

      fixtures are readily removable:

      a. Factory or office machines;

                  b. Equipment that is not primarily used or leased for use in  

                      the operation of the real property; or

                  c. Replacements of domestic appliances that are consumer  

                      goods;

            (3) The conflicting interest is a lien on the real property obtained by

                  legal or equitable proceedings after the security interest was 

                  perfected by any method permitted by this Article; or

            (4) The security interest is:

                  a. Created in a manufactured home in a manufactured-home 

                      transaction; and

                  b. Perfected pursuant to a statute described in G.S. 25-9-

                      311(a)(2). 

As to manufactured homes, G.S. 25-9-334 is subject to the priority rules in G.S. 47-20.6 and G.S. 47-20.7.  See G.S. 47-20.6(d) and G.S. 47-20.7(d). 

G.S. 25-9-334(f) provides that 

Priority based on consent, disclaimer, or right to remove. – A security interest in fixtures, whether or not perfected, has priority over a conflicting interest of an encumbrancer or owner of the real property if:

(1) The encumbrancer or owner has, in an authenticated record, 

      consented to the security interest or disclaimed an interest in the 

      goods as fixtures; or

(2) The debtor has a right to remove the goods as against the 

      encumbrancer or owner. 

In regard to the rule of priority under G.S. 25-9-334(h), Official Comment, par. 11 provides in part that: 

The priority under this subsection applies only to goods that become fixtures during the construction period leading to the completion of the improvement. The construction priority will not apply to additions to the building made long after completion of the improvement, even if the additions are financed by the real property mortgagee under an open-end clause of the construction mortgage. In such case, subsections (d), (e), and (f) govern. 

e. Miscellaneous observations about G.S. 25-9-334(e) and (f). 

G.S. 25-9-334(e) and (f), discussed in considerable detail under (d) above regarding “construction mortgages,” not only apply with preference over G.S. 25-9-334(h) but also apply generally to other situations, subject to G.S. 25-9-334(d) pertaining to a purchase money security interest in fixtures. 

5. Remedies of the secured party. 

The remedies available to a party secured by a fixture filing are specified in G.S. 25-9-601, G.S. 25-9-604(b) and G.S. 25-9-604(c). These remedies include the right to obtain a judgment lien. G.S. 25-9-601(a)(1). The judgment lien relates back to the earliest of the date of perfection of the security interest or the date of the filing of a financing statement. G.S. 25-9-601(e); G.S. 25-9-604(b). Also, G.S. 25-9-604(c) contains a right of removal.: 

Removal of fixtures. – Subject to the other provisions of this Part, if a secured party holding a security interest in fixtures has priority over all owners and encumbrancers of the real property, the secured party, after default, may remove the collateral from the real property. 

The secured party must reimburse any encumbrancer or owner for physical injury caused by the removal to the extent outlined in G.S. 25-9-604(d).           

Back to Top